Europe: Maastricht 2.0 and options for fiscal union

Jorge Sicilia

Chief Economist BBVA

ICCBE, June 2013

Europe: Maastricht 2.0 and options for fiscal union


Section 1

Maastricht 1.0

Section 2

The crisisSection 3

Maastricht 2.0 and the role of the banking unionSection 4

Towards a fiscal union?

Contents

Página 2


Maastricht 1.0

Mobility of goods and capital, but not so much of labour

Asymmetric shocks

No common fiscal policyNo bailout clause

Rigidities in prices and wages

Eurozone is NOT an Optimal Currency Area Maastricht Treaty workarounds

Countries to apply structural reforms and reduce rigidities (given the

incentives of having a fixed FX rate)

Deficit (3%) and debt (60%) criteria to avoid excessive public debt

Allow cyclical deficits (but below 3%)

Markets should discriminate across debtors

Página 3


Problems during the 1998-2007, hidden by growth (“known unknowns”)

1) Deficit and debt rules not fully respected

4) Markets did not believe the no-bailout clause

3) Few structural reforms, with divergences in unit labour costs

2) Private and external debts built up

Página 4


Failure #1: Deficit and debt rules not fully respected

But debt levels were not reduced below 60% in some countries despite the space to do itBut debt levels were not reduced below 60% in some countries despite the space to do it

Deficits in general below the 3% threshold, thanks to good economic environment

Deficits in general below the 3% threshold, thanks to good economic environment

Deficit rules were breached, also by France and Germany

Deficit rules were breached, also by France and Germany

Government debt and deficit 2005–2015Source: IMF

Página 5


Failure #2: Private and external debts built up

Maastricht had forgotten to control both external and private debt

Maastricht had forgotten to control both external and private debt

External deficits not considered a risk at the time

External deficits not considered a risk at the time

Initial interest rate shock created bubbles fuelled by private debt

Initial interest rate shock created bubbles fuelled by private debt

Private and external debt in the peripherySource: Haver Analytics, Eurostat and BBVA Research

France

Greece

IrelandItaly Portugal

Spain

-150

-120

-90

-60

-30

0

30

60

0 50 100 150 200 250 300 350

Net International Investment Position, % of GDP

Private debt, % of GDP

1998* 2012*

Macroeconomic imbalances scoreboard limits

Official limits by the EC: 1) Net foreign debt: 35% of GDP2) Private debt: 133% of GDP Página 6


Failure #3: Few structural reforms, no closure of structural current accounts

Wage rigidities overall persisted with a perceived low cost

Wage rigidities overall persisted with a perceived low cost

Some reforms in some countries after the convergence period (Germany, Spain) but not

generalised

Some reforms in some countries after the convergence period (Germany, Spain) but not

generalised

Percentage change in unit labour costs since 1998Source: Haver Analytics, Eurostat and BBVA Research

0

10

20

30

40

50

60

Greece Ireland Portugal Spain Germany France Italy

1998 to Peak 1998 to Latest

* Peaks are Q1-2010 for Greece, Q4-2008 for Ireland and Q1-2009 for Portugal and Spain. For France, Germany and Italy peak refers to 2010 since unit labour costs peak in the last available period. Página 7


Failure #4: Markets did not believe no-bailout clause: no differentiation

1) They believed that ultimately “Europe” would bailout problem countries.

2) They were distracted by high growth3) They did not really think it through

1) They believed that ultimately “Europe” would bailout problem countries.

2) They were distracted by high growth3) They did not really think it through

But markets did not differentiate across countries

But markets did not differentiate across countries

No-bailout clause was key to force governments to keep house in order in the

absence of a fiscal union

No-bailout clause was key to force governments to keep house in order in the

absence of a fiscal union

-100

0

100

200

300

400

500

600

700

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Spain Italy Portugal Greece Ireland

10-year government spreads vs Germany 1995-2007Source: Bloomberg and BBVA Research

Página 8


Section 1

Maastricht 1.0

Section 2

The crisisSection 3



Contents

Página 9


New problems after the 2009-2013 crisis (“unknown unknowns”)

1) Structural fiscal positions turned out to be much worse than expected

5) Market sentiment reversed, possibly implying overreaction

2) High private and public debt hit bank’s balance sheets: bank-sovereign loop

4) Euro redenomination risk shows up

3) Fragmentation and renationalization of flows, in particular in interbank market

Página 10


1) Deterioration of fiscal positions

In some cases, official debt levels also rose due to hidden past debt

In some cases, official debt levels also rose due to hidden past debt

Problem: The structural fiscal deficit turned out to be much higher than what was believed before the crisis

Problem: The structural fiscal deficit turned out to be much higher than what was believed before the crisis

Fiscal revenues that seemed permanent were of a temporary nature

Fiscal revenues that seemed permanent were of a temporary nature

-10,0

-9,0

-8,0

-7,0

-6,0

-5,0

-4,0

-3,0

-2,0

-1,0

0,0

nov-07 Last estimate* nov-07 Last estimate*

Periphery countries* EA 12

Cyclical component Cyclically adjusted balance

* Periphery countries includes Portugal, Italy, Ireland, Greece and Spain. Last estimate date is May-2014

Estimate of the 2009 public deficit before (2007) and after the crisis (2014)Source: AMECO

Página 11


2) Bank-sovereign loop

High correlation between bank and sovereign spreads

High correlation between bank and sovereign spreads

Unclear EU rules for bank rescues imply that what counts is the strength of the sovereign Unclear EU rules for bank rescues imply that what counts is the strength of the sovereign

0

50

100

150

200

250

300

350

400

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Fin. Senior EA 5yr CDS Sov*

* EA: Weighted average ( % debt of total EA debt), Greece is not

Bank and sovereign spreads in the eurozone (bp)Source: Bloomberg and BBVA Research

Problem: Doubts of sovereigns translated into a problem for banks and the negative feedback loop settled in

Problem: Doubts of sovereigns translated into a problem for banks and the negative feedback loop settled in

Banking size and sovereign debt portfolio, 2012Source: BBVA Research

SPEAGE

FR

IT

NL

IR

BE

GR

PTATFI

0

100

200

300

400

500

600

700

800

0 2 4 6 8 10

Banking S

ize as %

of GDP in 2013

Sovereign debt as % of total assets

Página 12


3) Fragmentation and renationalization of risk

Composite measure of EZ financial fragmentation*Source: Bloomberg and BBVA Research

* First principal component of (i) the cross country dispersion (specifically, coefficient of

variation) of bank lending rates to corporates and households (average) (ii) the Target 2

balances of surplus (iii) gross liquidity provision by Eurosystem as a share of bank assets and

(iv) the interquartile range of Euro area countries’ two-year government bond yields

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Renationalization of riskRenationalization of risk

Cross-country interbank flows much reducedCross-country interbank flows much reduced

Problem: For equal risk there were differences in interest costs faced by firms based on location, against the logic of a monetary union

Problem: For equal risk there were differences in interest costs faced by firms based on location, against the logic of a monetary union

Página 13


4) Euro redenomination risk

Contagion to the rest of the periphery, including systemic countries such as Italy and

Spain

Contagion to the rest of the periphery, including systemic countries such as Italy and

Spain

Initial decision not to bail out Greece at Deuville reinforced that sentiment

Initial decision not to bail out Greece at Deuville reinforced that sentiment

Bank-sovereign loops and recession-debt loops created the impression that the euro might not

be sustainable

Bank-sovereign loops and recession-debt loops created the impression that the euro might not

be sustainable

Problem: Sovereigns and private agents were paying a spread not only corresponding to their own fundamentals, but also to the perceived risk of an euro breakup, which by itself would

lead to multiple defaults

Problem: Sovereigns and private agents were paying a spread not only corresponding to their own fundamentals, but also to the perceived risk of an euro breakup, which by itself would

lead to multiple defaults

-0,6

0,0

0,6

1,2

1,8

2,4

2008 2009 2010 2011 2012 2013 2014

US EMU

US driven risk:

Lehman EMU driven risk:

euro breakup

Index of financial tensions: US and EZSource: Bloomberg and BBVA Research

Página 14


5) Market sentiment reversed, perhaps too much10-year government spreads vs GermanySource: Bloomberg and BBVA Research

-500

0

500

1000

1500

2000

2500

3000

3500

4000

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Spain Italy Portugal Greece Ireland

But spreads rose above equilibrium levels for some countries

But spreads rose above equilibrium levels for some countries

The second recession reinforced the sentiment that public debts might not be sustainable

The second recession reinforced the sentiment that public debts might not be sustainable

Spreads rose with the Greek crisis, and shot up when the possibility of PSI was apparent

Spreads rose with the Greek crisis, and shot up when the possibility of PSI was apparent

Problem: The issues mentioned above plus the reaction of rating agencies and the interconnectedness of European economies derived in contagion, suddenly raising borrowing costs

Problem: The issues mentioned above plus the reaction of rating agencies and the interconnectedness of European economies derived in contagion, suddenly raising borrowing costs

Página 15


Section 1

Maastricht 1.0

Section 2

The crisisSection 3



Contents

Página 16


Reaction to the crisis: patchy and “late-night”, with ad-hoc measures for each new problem

Fiscal compact and six-pack and two-packPublic imbalances

Six-pack and macro-prudential measuresPrivate debt

Six-pack, structural reforms, troika programsExternal imbalances

EFSF, ESM, LTROs, Banking UnionFragmentation, renationalization

OMT, Banking unionEuro redenomination

Banking unionBank-Sovg loop

Potential imbalance or risk

New measures implemented during the crisis

Página 17


Maastricht 2.0: The new setup seems workable

No-bailout clauseNo-bailout clause

Largest cesion of sovereignty since creation of euro

Largest cesion of sovereignty since creation of euro

Implicit role as sovereign lender if there is redenomination risk.

Implicit role as sovereign lender if there is redenomination risk.

ESM for bailoutsESM for bailouts

Implicit ECB backstopImplicit ECB backstop

Banking union (with SSM and SRM) as the main instrument

Banking union (with SSM and SRM) as the main instrument

Main features

Mutualization is mostly private (banking sector); tax-payers’ burden minimized

Mutualization is mostly private (banking sector); tax-payers’ burden minimized

Evaluation

Seems contradictory.But PSI still possible.

Bailouts only as last option, subject to conditionality

Seems contradictory.But PSI still possible.

Bailouts only as last option, subject to conditionality

Fiscal compact and new monitoring architectureFiscal compact and new monitoring architecture Reinforced and expanded, but doubts that sanctions work

Reinforced and expanded, but doubts that sanctions work

Approval of OMT by European Court of Justice still pending

Approval of OMT by European Court of Justice still pending

No treaty change was requiredNo treaty change was required

Página 18


Section 1

Maastricht 1.0

Section 2

The crisisSection 3



Contents

Página 19


Is the new setup sustainable? Two paths for action

All the new measures and institutions are outside the Treaty

1)Institutional instability:

Messy setup

2) Economic instability:

Monetary union is

incomplete

The exit of a country is still possible, but the rules unclear

The legal status of OMT needs to be clarified

Ambiguity on bailouts (no bailout + ESM rescues)

Complex relationship between Eurozone and EU

Treaty change?

Is the sanctions regime strong enough to avoid future imbalances?

Legacy problem: Are public debts too high?

Is a public backstop necessary to complete banking union?

Do we need an asymmetric shock absorber for future crises?

Fiscal union?

Página 20


What features of fiscal union?

Equalization system

Small common budget to counter asymmetric shocks

Common independent fiscal authority at EU level

Politically difficult; it already exists at small scale (EU funds)

For normal crises, current deficit rule is flexible enough.For systemic crises, it is useless.

It would help to avoid problems of hidden debt (Greece), unify methodologies for structural deficits, build institutional fiscal trust among members, etc.

1) Common budget (meaning also revenues!)

2) Common independent fiscal authority

Página 21


What features of fiscal union?

Public backstop for banking union

Eurobonds, common and several liability

Eurobills

Debt redemption fund

ESM with borrowing capacity from markets might be enough in the short-term

Politically difficult

Politically more feasibleSymbolic value. Embryonic value.

To deal with legacy debt

3) Risk sharing, common instrument for monetary transmission

Common Treasury, common issuance

Politically even more difficult: Countries to cede sovereignty

M

o

r

e

I

n

t

e

g

r

a

t

i

o

n

Página 22


Eurobills: main features

Limits the extent of mutualization in first years, but can grow up as confidence returnsLimits the extent of mutualization in first years, but can grow up as confidence returns

A safe a liquid assetA safe a liquid asset

Strong symbolic valueStrong symbolic value

Only short-term term bonds, small quantities at the beginningOnly short-term term bonds, small quantities at the beginning

Can be implemented without Treaty change if are introduced as temporary, through combination of art 312 and intergovernmental agreement

Can be implemented without Treaty change if are introduced as temporary, through combination of art 312 and intergovernmental agreement

Fiscal discipline:• Exclusion rules: It can be linked to fulfillment of deficit and debt rules• Extra cost can be linked to fulfillment of fiscal targets

Fiscal discipline:• Exclusion rules: It can be linked to fulfillment of deficit and debt rules• Extra cost can be linked to fulfillment of fiscal targets

Short-term bills with joint and several liability to finance European or national budgetsShort-term bills with joint and several liability to finance European or national budgets

Página 23


Italy: Debt Redemption Fund/Pact (% of GDP)Source: BBVA Research

Debt Redemption Fund. How would it work?The case of Italy

Debt above 60% of GDP is transferred in three years into a European fund that would issue

bonds…

Debt above 60% of GDP is transferred in three years into a European fund that would issue

bonds…

… to cover refinancing requirements of participating countries

… to cover refinancing requirements of participating countries

Annual payment would bear the (lower) interest costs arising for the bonds issued by

the fund and would also repay the debt0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

Government debt outside ERP as % of GDP Government debt in ERP as % of GDP

50%50%50%50%

30%30%30%30%

20%20%20%20%

Countries enter into repayment obligations to repay its transferred debts within 25 yrs

Página 24


Debt redemption fund: main features

Introduces a mechanism to reduce high initial debt (legacy problem)Introduces a mechanism to reduce high initial debt (legacy problem)

Temporary mutualization, not a permanent fiscal unionTemporary mutualization, not a permanent fiscal union

Complements the monitoring setup: strict rules, coordination and multilateral surveillance, avoiding moral hazard

Complements the monitoring setup: strict rules, coordination and multilateral surveillance, avoiding moral hazard

If countries respond to the fund’s debt with joint a several liability, it requires a Treaty change

If countries respond to the fund’s debt with joint a several liability, it requires a Treaty change

Lower interest payments for the country for the transferred debtLower interest payments for the country for the transferred debt

There is an European asset that can be used for monetary policy operationsThere is an European asset that can be used for monetary policy operations

Requires a compromise of high primary surpluses for many years (debt reduction), lacking flexibility

Requires a compromise of high primary surpluses for many years (debt reduction), lacking flexibility

Página 25


Debt Redemption Fund Size (€bn)Source: BBVA Research

The fund size to reduce debt up to 90% is twice the current size ofthe ESM (500bn)

We consider all countries (also Ireland and Portugal) with debt above certain thresholdsWe consider all countries (also Ireland and Portugal) with debt above certain thresholds

Depending on the maturity structure and redemption payments, only a part of the fund

should be guaranteed

Depending on the maturity structure and redemption payments, only a part of the fund

should be guaranteed

0

500

1000

1500

2000

2500

3000

3500

ESM 90% 75% 60%

With Greece Without Greece

Página 26


3

1

2The new setup (banking union, reinforced imbalances monitoring, ESM) is probablysufficient to make the EZ resilient in the absence of very large shocks

But progress towards more integration, especially fiscal integration, is desirable

The reaction to the crisis has created a messy institutional framework that should be reorganized, probably through a Treaty change, during the next 5 years.

Página 27

Conclusions

4 Politically feasible options for moves towards a fiscal union include Eurobills and/or a debtredemption fund

Jorge Sicilia

Chief Economist BBVA

ICCBE, June 2013


Annex 1: Banking Union


Page 30

It has contained the fragmentation process(building the required bridge to defend the

euro)…

It has contained the fragmentation process(building the required bridge to defend the

euro)…

This project is not designed to solve and pay forthe problems of the past, rather those of the

future…

This project is not designed to solve and pay forthe problems of the past, rather those of the

future…

The SSM is a game changer for bankingsupervisory culture and practice in Europe…The SSM is a game changer for banking

supervisory culture and practice in Europe…

Under the SRM ailing banks will need to be resolved over a weekend with recourse to

private funds

Under the SRM ailing banks will need to be resolved over a weekend with recourse to

private funds

… but it has to be completed with a single deposit guarantee fund and a explicit fiscal

backstop and move towards deeper economic, fiscal and political union

… but it has to be completed with a single deposit guarantee fund and a explicit fiscal

backstop and move towards deeper economic, fiscal and political union

…but a definitive solution to the legacyproblems has to be applied to restore

confidence

…but a definitive solution to the legacyproblems has to be applied to restore

confidence

… but will have to set up a constructiverelationship with third countries (home-host). The same challenge than other institutions, as

in the U.S.

… but will have to set up a constructiverelationship with third countries (home-host). The same challenge than other institutions, as

in the U.S.

…but the uncertainty on the common publicbackstop must be dispelled (it will take time!)…but the uncertainty on the common publicbackstop must be dispelled (it will take time!)

To what extent has the BU process made progress?

It will take time to break the vicious circle between banks and the sovereign, but we

have already started……


The Eurozone needs to go beyond harmonization, it needs integration

Homogeneous criteria for supervision and resolution, with centralized decision

making

CRD IV

SSM

SRM

BRRD

SDGS

DGDS

Same prudential rules

Same rules for crisis management

Same rules for deposit protection

UE 28

Background:

same rules

Pillar I

Pillar II

Pillar III?

EZ 18

Pillars: same

interpretation and

implementation

Page 31

Substantial progress in a short period of time


What for?

The new framework for banking supervision in the Eurozone

Page 32

From 04/11, the ECB will become legally responsible for nearly 6.000 banks

Why the ECB? Reputation, independence, knowledge, legal reasons

Which entities?

Unified interpretation and implementation of the new

prudential rules (CRDIV pack)

Unified interpretation and implementation of the new

prudential rules (CRDIV pack)

Put an end to national ring-fencingand forbearance practices

Put an end to national ring-fencingand forbearance practices

Increase confidence in thesupervision of the European

financial sector

Increase confidence in thesupervision of the European

financial sector

ECB direct supervisory scope, by countrySource: BBVA Research and ECB

27,9%

5,9%4,4% 2,9% 2,2% 2,2%

11,8%

2,2%2,2%

5,1%2,9% 4,4% 3,7%

10,3%

5,9%

2,2%3,7%

21,2%

2,9%

5,8%

0,3% 0,1% 0,1%

13,9%

0,1%2,0%

28,7%

1,2%

9,3%

2,1%

10,0%

0,7% 0,0%1,5%

Germ

any - 38

Austria - 8

Belgium - 6

Cyprus - 4

Slovakia - 3

Slovenia - 3

Spain - 16

Estonia - 3

Finland - 3

France - 7

Greece - 4

Netherlands - 6

Ireland - 5

Italy - 14

Luxemburg - 8

Malta - 3

Portugal - 6

% Banks over total under ECB supervision % Assets over total under ECB supervision


3

1

2Resources/appropriate tools: budget (supervision fee) + recruitment (complete the hiring of about 1,000 skilled employees)

Orderly transfer of functions and knowledge from national authorities to the ECB

Single effective supervision: develop a single book for supervision, establish the JointSupervisory Teams

Page 33

Single supervision: challenges ahead

Stages to complete, before being fully operational on November 4, 2014

4 Ensure the necessary mechanisms for adequate separation between prudential and monetary functions within the ECB

1

2

3

4


A resolution equal for all banks in the Eurozone

Page 34

What for?

From 01/2015, the Board will be responsible for nearly 6,000 banks

Provide the single supervision with a credible counterpart at the same levelProvide the single supervision with a credible counterpart at the same level

Preserve the level playing-field by ensuring a uniform implementation of the

EU bank resolution rules (BRRD)

Preserve the level playing-field by ensuring a uniform implementation of the

EU bank resolution rules (BRRD)

Enhance cross-border resolution processes in the EU

Enhance cross-border resolution processes in the EU

• Directly supervised by the ECB

• Transeuropeans• Requiring the use of the SRF

• Directly supervised by the ECB

• Transeuropeans• Requiring the use of the SRF

• Indirectly supervised by the ECB

• No trans-europeans• Not requiring the use of the SRF

• Indirectly supervised by the ECB

• No trans-europeans• Not requiring the use of the SRF

Which entities?

Direct resolution Indirect resolution


New framework to finance banking resolution

Page 35

The IGA defines the use, transferences and mutualisation of funds

1. Affected compartments1. Affected compartments

2. Mutualised funds of all compartments of the Fund2. Mutualised funds of all compartments of the Fund

3. Remaining funds of affected compartments3. Remaining funds of affected compartments

4. Ex-post contributions

Loans between compartments

5. Borrowing capacity of the SRF

Use of the Fund (2016-2023)Use of the Fund (2016-2023) Progressive mutualisation of fundsSource: European Commission

0

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2016 2017 2018 2019 2020 2021 2022 2023

Mutualised funds (final agreement)

Mutualised funds (December Council position)

A single private fund from 2016, to reach €55 Bn in 8 years


4

1

2Set the Board and management provisions necessary for the first step. Establish fees to cover SRM administrative costs and collect them before 2015

Throughout 2015, complete the construction of the SRM (public backstop for the single Fund) and prepare to take on resolution functions in January 2016

It is necessary to complete the legislative process to establish the Single Resolution Authority as soon as possible. Recruitment of 200-300 FET of staff.

Page 36

Single resolution: challenges ahead

The agenda for the coming months is very ambitious

3 Develop and adopt, before 2015, the methodology for contributions to the national fund (2015) and the Single Resolution Fund (2016)

1

2

3

4

Annex 2: European elections


Europe 2014 2009

Party Votes %Seats(Total 751) Votes %

Seats(Total 766)

EPP (Centre-right) 28,4 213 35,8 274

S&D (Centre-left) 25,3 190 25,6 196

ADLE (Liberals) 8,5 64 10,8 83

Greens/ALE 7,1 53 7,4 57

CRE (conservatives) 6,1 46 7,4 57

GUE/NGL (Left) 5,6 42 4,6 35

EFD (Nacionalist right) 5,1 38 4,1 31

Not attached members 5,5 41 4,3 33

Others 8,5 64

PPE+S&D+ADLE 62,2 467 72,2 553

Ger=65

Ita=47

Fra=40

Spa=33

Ger=77

Ita=63

Fra=49

Spa=46

Election results: anti-system parties up, but mainstream keeps majority

38

Anti-establishment parties are very heterogeneous.

Victories in France, UK and Greece

Anti-establishment parties are very heterogeneous.

Victories in France, UK and Greece

The three mainstream parties keep 62% of votes and seats: EPP and SD get 54%

The three mainstream parties keep 62% of votes and seats: EPP and SD get 54%

Among mainstream parties, Germany and Italy gain influence

Among mainstream parties, Germany and Italy gain influence


Implications for European agenda

Página 39

The weakening of the mainstream implies more difficulties to approve decisions andand to influence Commission and Council’s politicsThe weakening of the mainstream implies more difficulties to approve decisions andand to influence Commission and Council’s politics

France loses influence against Germany and ItalyFrance loses influence against Germany and Italy

Italy and France will likely press for more EU-wide investment, for helping youth unemployment and perhaps for a slower fiscal consolidation. Germany could agree on the first two.Italy and France will likely press for more EU-wide investment, for helping youth unemployment and perhaps for a slower fiscal consolidation. Germany could agree on the first two.

Elections make it easier to focus more on consolidating what already XXX. In 4 years time, there will be a serious debate on the road map: more weight to the European Parliament or a union based more on national criteria (attention to measures such as Schengen)

Elections make it easier to focus more on consolidating what already XXX. In 4 years time, there will be a serious debate on the road map: more weight to the European Parliament or a union based more on national criteria (attention to measures such as Schengen)

Transnational commercial agreements such as TTIP will be more difficult for the strong opposition of emerging parties.Transnational commercial agreements such as TTIP will be more difficult for the strong opposition of emerging parties.

The UK is becoming even more eurosceptic.The UK is becoming even more eurosceptic.


Implications for individual countries

Página 40

Far-right (25%) beats centre-right (21%) and centre-left (14%)France

Huge victory of the centre-left (41%) defeating Grillo (21%). Government strengthened to implement structural reforms and ask Europe for less contractive policies

Italy

Emergence of anti-euro party (8%). The difference between CDU and SDP is maintainedGermany

Government party wins elections despite the crisis, but both mainstream parties get less than 50%. Emergence of new anti-establishment party on the left

Anti-establishment Syriza wins, but not with enough strenght to call early national electionsGreece

Opposition socialist party beats government coalition, but with less margin than expectedPortugal

Spain

Annex 3: Proposals for Eurobonds


Proposals for Eurobonds

Eurobills(Hellwig and Phillipon, 2011)

Debt redemption fund(German Council of Economic

Experts, 2011)

Red-Blue bonds(Delpla, V. Weizsäcker, 2010)

Stability bonds(EU Commission, 2011)

Short-term securities, joint and several guarantee, issued by a eurozone debt management office, conditionality on fiscal

discipline required, cap at 10% of GDP

Debt exceeding 60% of GDP is tranferred to a debt redemption fund (EDR), for which countries and jointly and severally liable. In

25 years banks repay the debt, earmarking part of revenues

Joint and several liability of debt up to 60% of GDP. Blue debt is senior; managed by independent stability council.

Commission proposal including three modalities: 1) Full eurobonds, 2) Blue-red bonds up to 60% of GDP; 3) EFSF bonds (no several

and joint liability)

European Safe Bond(ESBies, 2011)

Pool of secondary market bonds by a new debt agency (EDA) up to 60% of GDP. EDA to issue two types of bonds, safe and junior. No

joint and several liability.

Página 42

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Europe: Maastricht 2.0 and options for fiscal union

Economy & Finance